Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 430

Slowing global trade not the threat investors fear

Contributing authors: Jonathan Lemco, Asawari Sathe, Adam J. Schickling, Maximilian Wieland, and Beatrice Yeo, from the Vanguard Investment Strategy Group’s Global Economics Team.

The last 12-plus months have emphasised that the COVID-19 pandemic would accelerate trends already in place. One of these trends is the shortening, and in some cases the reshoring, of supply chains, as business leaders question whether their supply chains have been stretched too far and become too complex.

Such a trend raises a natural question: Is globalisation dead?

New Vanguard research, The deglobalisation myth(s), concludes that, no, globalisation isn’t dead. Instead, global trade growth is likely to slow, as it’s been doing since the GFC. This slowing in global trade growth, what we term ‘slowbalisation’, is unlikely to turn into a contraction in global trade. What’s more, the implications for investors are only modest.

A slowbalization scenario is the most likely outcome

Sources: Vanguard calculations, using data from the World Bank, the Organisation for Economic Co-operation and Development, and the KOF Swiss Economic Institute.

The allure of global trade is understandable

Companies that produce goods or provide services want the largest possible markets for their outputs. But a structural expansion in supply chains, which boosted gross trade in the 1990s and early 2000s, started to slow even before the GFC. A turn toward protectionism - government policies that favour domestic industries - over the last decade in the face of rising inequality in developed economies is likely to similarly tap the brakes on global trade.

We note that other aspects of globalisation, including international capital flows, knowledge sharing, and geopolitics, carry potentially significant economic, societal, and environmental consequences. Our latest research focuses on just one aspect of globalisation that addresses a specific concern of investors: the trade of goods and services.

The concern is that slowing global trade growth may reduce corporate earnings and profit growth and, by extension, weigh on equity prices. After all, a globalisation wave that began in the 1990s coincided with a six-fold increase in S&P500 Index earnings per share and more than a doubling of profit margins, contributing to almost 90% of the index’s price return over most of three decades.1

Risks to investors may not be as great as they seem

But we contest the view that globalisation has been the central factor in the expansion of these return drivers. Our research demonstrates an inconclusive or weak relationship between earnings growth and changes in trade dependency. And it shows that industries with the greatest increase in profit margins since 1990 - finance and insurance, and office and computer machinery are examples - have experienced only modest changes in trade dependency.

Trade tensions that precipitated sharp bouts of market volatility just a few years ago underscore the importance that investors ascribe to global commerce with few impediments. No doubt, geopolitical risks are ever present and worthy of attention. But our new research quantifies risks related specifically to a future of slowing global trade growth, and we believe that these risks to investors aren’t as large as they’re sometimes portrayed.

Rather, we emphasise conclusions shared by our new research and our December 2020 research A Tale of Two Decades for U.S. and Non-U.S. Equity: that corporate earnings growth hasn’t been a major contributor to U.S. equity outperformance in the past and that we shouldn’t expect it to have a meaningful impact on future outperformance or underperformance.

Valuations, or the price investors pay for earnings, represent the most important signal for future asset returns.

 

1 The average annual S&P 500 Index price return from 1990 to 2018 was 7.4%. Three factors make up this return: valuation expansion/contraction (dollar paid per dollar of earnings), earnings growth from revenue growth, and earnings growth from ratio of earnings to revenue (profit margins). Contributions from these factors were 0.8%, 3.7%, and 2.9%, respectively. 

 

Vanguard is a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual. For more articles and papers from Vanguard, please click here.

 

RELATED ARTICLES

Reshoring supply chains: What does it mean for investors?

Ukraine-Russia conflict update: Compendium of research

What’s the truth about stagflation?

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

Welcome to Firstlinks Edition 583

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Planning

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

Economy

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

SMSF strategies

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Economics

Australia is lucky the British were the first 'intruders'

British colonisation's Common Law system contributed to economic prosperity, in contrast to Latin America's lower wealth under Civil Law. It influenced capitalism's success in former British colonies, like Australia.

Economics

A significant shift in the jobs market

The expansion of the 'care sector' represents the most profound structural change to Australia's job market since the mining boom. This analyses how it's come about and the impact it will have on the economy.

Shares

Searching for value in tech stocks

Just because a stock is cheap doesn't necessarily make it good value. This uses case studies in the tech sector to help identify when stocks trading on 30x earnings may be inexpensive and when others on 10x may be value traps.

Investing

Are more informed investors prone to making poorer decisions?

Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, three predictors of panic selling, and why nurses tend to be better investors than doctors.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.